2024-01-29 10:35:00
China Evergrande Group has received a winding-up order from a Hong Kong court, ending years of ups and downs for the company. The impact of China Evergrande’s default rippled through the Chinese economy.
The court issued the winding-up order despite last-ditch efforts by the company’s creditors over the weekend to reach a deal, according to people familiar with the matter. The company defaulted on its dollar bonds more than two years ago, becoming one of the first dominoes to fall in China’s troubled real estate sector.
Hong Kong High Court Judge Linda Chan said it was time for the court to say enough was enough.
The judge said Evergrande was once again allowed to postpone the liquidation hearing in December last year to propose a new restructuring agreement, solicit opinions from creditors and obtain legal advice on related plans. Chen Jingfen said that none of these were fulfilled.
Evergrande’s lawyers argued for another adjournment, saying an immediate liquidation order would affect the value of the company’s overseas assets and subsidiaries, thereby harming creditors’ potential recoveries. But lawyers for the main creditor group argued that Evergrande had not negotiated in good faith with them, a view agreed by the judge.
The liquidation of China Evergrande could send another shock wave to China’s real estate industry, which has seen dozens of developers collapse in the past two years due to bank divestments and a sharp correction in property values.
Evergrande was once China’s largest real estate developer by sales. But Evergrande, saddled with about $300 billion in debt, stopped repaying debt more than two years ago and has been in restructuring talks with creditors since then.
The court order will give creditors control of Evergrande’s parent company and allow them to liquidate all of Evergrande’s operations.
The court will now appoint a liquidator for Evergrande’s parent company. The liquidator will have the right to take over all Evergrande’s subsidiaries around the world, including in China, and sell the company’s assets to repay debts.
A large portion of Evergrande’s assets have been sold, seized by creditors or frozen by Chinese courts. The price of Evergrande’s U.S. dollar bonds last Friday was less than 2% of their face value.
The shares of China Evergrande and its listed subsidiaries were suspended from trading in Hong Kong in the middle of the morning session today. Shares in China Evergrande fell 21% before the trading halt after The Wall Street Journal published a report that talks collapsed.
One unresolved question is the extent of the legal powers of Hong Kong liquidators in mainland China. Chinese courts have recently begun to recognize the legal powers of liquidators in jurisdictions such as Hong Kong, where Evergrande’s parent company is listed. In 2022, a Shenzhen court recognized the power of a liquidator appointed by a Hong Kong court in the Samson Paper restructuring case.
In another court hearing this afternoon, Chen Jingfen appointed Tiffany Wong and Eddie Middleton, managing directors of Alvarez & Marsal, as joint liquidators of China Evergrande. Middleton previously led Lehman Brothers’ liquidation efforts in Asia. Wong recently participated in the restructuring of Luckin Coffee.
Wong said in a statement that the liquidation order only applies to the parent company and will not have a direct impact on China Evergrande’s subsidiaries in mainland China. “Our priority is to retain, restructure or keep operating as much of our business as possible,” Wong said.
Top Shine Global, one of Evergrande’s overseas creditors, filed an application to liquidate Evergrande in June 2022. Since then, Evergrande’s liquidation hearings have been postponed many times. Chinese regulators blocked an earlier restructuring deal after banning Evergrande from issuing new securities, a key part of the restructuring plan.
Evergrande’s default was a watershed moment for China’s real estate industry, which also triggered a liquidity crisis in the industry. Since then, more than 50 Chinese real estate developers have defaulted, and thousands of industry workers have lost their jobs.
Sunac China, another major real estate company that defaulted on its debt, completed a debt restructuring late last year and provided a roadmap for its peers. Sunac China’s overseas debt restructuring plan was approved by investors holding 98.3% of its overseas bonds.
The real estate crisis has dealt a blow to the Chinese economy. Real estate and related industries were once the main force driving China’s economic growth, accounting for about a quarter of China’s GDP. Now, the real estate industry is dragging down China’s economy, and the industry’s downturn looks set to last for years to come.
New data on the performance of China’s real estate industry in 2023 paints a desperate picture, with economists pointing out that the downturn, now in its fourth year, is about to get worse.
Data from the China Bureau of Statistics show that the transaction area of new commercial residential buildings in 2023 will drop by about 6% year-on-year, falling back to the lowest level since 2016. Even in China’s wealthiest cities, house prices are falling. China’s local governments have lost a major source of revenue as land sales plummet.
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